Good sourcing agents are both hard to find and worth their weight in gold. And they operate in many different ways. On one extreme, a sourcing agent will find a factory, take a finder’s fee and then bow out, letting you deal with the factory directly. On the other extreme, a sourcing agent will act as your exclusive point of contact: you order from them, communicate with them, and pay them, and are expressly precluded from having contact with the factory. Most, however, fall somewhere in between.
The multitude of potential arrangements creates uncertainty about the appropriate contractual protections. That is: should you have an agreement with the sourcing agent, the factory, or both? And what type of agreement?
We are big fans of using NNN agreements in China with potential business partners (especially factories). Knowing this, our clients will sometimes come to us and say that they are having goods manufactured in China and they need an NNN agreement for use with everyone. It’s not that this is per se incorrect, but it’s often putting the cart before the horse. An NNN agreement is not the proper agreement in every situation.
If you don’t know the identity of the factory manufacturing your goods, an NNN agreement with them is out of the question. You can’t enter into a contract with an unknown company! And if you have a complicated arrangement with a sourcing agent or a factory, then an NNN agreement won’t go nearly far enough.
In short, the arrangement you have with your sourcing agent will determine the agreements you need, and with whom. We addressed these issues last year in China Manufacturing: To Broker or not to Broker, That is the Question, with particular attention to the question of whether you could (or should) have a contract solely with your sourcing agent. It will probably not surprise you to hear that the answer is: it depends.
In an ideal world, if you are dealing with factories directly, you would want NNN agreements with the factories with which you have initial talks, development agreements with the factories that develop products for you, and OEM agreements (aka contract manufacturing agreements) with the factories that actually manufacture products for you. In this situation, the agreement with the sourcing agent would be fairly simple because they aren’t doing much – it’ll basically be an NNN agreement with some additional verbiage to cover the finder’s fee. You don’t want the sourcing agreement to be the only agreement in place, because it offers so little protection.
If you are dealing exclusively with your sourcing agent, then you won’t – can’t – have any agreements with the factories. You will need to look to the sourcing agent exclusively for everything: non-competition, non-circumvention, non-disclosure, quality control, ordering, warranty, etc., because you have no contractual privity with the Chinese factories and no way to hold them responsible for anything. This can be useful if the sourcing agent is based in the United States because it is a lot easier to go after a US company. But this presupposes that the US company has assets, and that your agreement with them allows you to hold them responsible for the actions of the Chinese factories. In this situation, the sourcing agreement is all-important and must be carefully drafted, because many sourcing agents will attempt to avoid responsibility for everything from delays to quality issues to IP infringement. Working with these agents is taking a huge risk: if the sourcing agent isn’t responsible for the actions of the Chinese factories, and you don’t even know the identity of the Chinese factories, you’ve got no recourse if things go south.
For all of the sourcing agents in between, you’ll want a robust sourcing agreement and at the very least NNN agreements with the factories. Whether the development and manufacturing agreements are with the factories or the sourcing agent will depend on the particulars of how you deal with the various parties, and also your ability to hold them responsible when things go wrong. If the sourcing agent is a well-established company with multiple employees and a real office and sizable assets, it’s reasonable to look to the sourcing agent for everything. If it’s one guy with a virtual office in Los Angeles who spends most of his time overseas, not so much. Of course, the ideal situation from a legal standpoint is not always possible in the real world, so you need to adjust to the situation on the ground.
Some clients ask our China lawyers if they can just have NNN agreements “with everyone” and leave it at that? Certainly, it does not hurt to have NNN agreements with every party on the sourcing agent/manufacturer side. But it won’t cover all potential forms of liability – not even close. It will only hold counter-parties liable for misuse of your IP. For some clients, this is enough, particularly during initial phases when they are unsure whether their IP can really be commercialized.
And no matter what agreements you sign with your sourcing agent and factories, you still need to register all of your IP (patents, trademarks, copyrights) in China. You could have an ironclad agreement with a great sourcing agent who only uses wonderfully compliant factories, and it won’t mean a thing if some third party registers your trademark or copies your patented goods.